IDEXX Laboratories, Inc. (NASDAQ:IDXX) Q1 2024 Earnings Call Transcript

IDEXX Laboratories, Inc. (NASDAQ:IDXX) Q1 2024 Earnings Call Transcript May 1, 2024

IDEXX Laboratories, Inc. beats earnings expectations. Reported EPS is $2.81, expectations were $2.7. IDXX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the IDEXX Laboratories First Quarter 2024 Earnings Conference Call. As a reminder, today’s conference is being recorded. Participating in the call this morning are Jay Mazelsky, President and Chief Executive Officer; Brian McKeon, Chief Financial Officer; and John Ravis, Vice President, Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the forward-looking statements noticed in our press release issued this morning, as well as in our periodic filings with the Securities and Exchange Commission, which can be attained from the SEC or by visiting the Investor Relations section of our website, idexx.com.

During this call, we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles, or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which may also be found by visiting the Investor Relations section of our website. In reviewing our first quarter 2024 results and updated 2024 guidance, please note all references to growth, organic growth and comparable growth refer to growth compared to the equivalent prior year period, unless otherwise noted. To allow broad participation in the Q&A, we ask that each participant limit their questions to one with one follow-up as necessary. We appreciate you may have additional questions, please feel free to get back into the queue and if time permits we will take your additional questions.

Today’s prepared remarks will be posted to idexx.com investors after the earnings conference call concludes. I would like to turn the call over to Brian McKeon.

Brian McKeon: Good morning and welcome to our first quarter earnings call. Today, I’ll take you through our Q1 results and review our updated financial outlook for 2024. In terms of highlights, IDEXX achieved solid organic revenue growth and strong profit gains in the first quarter. Overall revenues increased 7% organically, supported by 7% organic growth in CAG Diagnostic recurring revenues. Solid revenue gains were net of negative growth effects from severe US weather in January, which we estimated lowered overall IDEXX organic revenue growth by 0.5% to 1% and added pressure to US same-store clinical visit growth levels. IDEXX execution trends remained strong, reflected in a continued high IDEXX CAG Diagnostic recurring revenue growth premium, 8% global gains in premium instrument placements, and 11% organic gains in recurring veterinary software and diagnostic imaging revenues.

Profit delivery was excellent in the quarter, supported by gross margin gains. Strong operating margin performance enabled EPS delivery of $2.81 per share. EPS was a 10% as reported and 9% on a comparable basis, net of a 7% negative EPS growth impact for the lapping of a prior year customer contract resolution payment. Overall, we’re pleased with our continued progress in expanding our business and delivering strong financial performance, as we continue to work through sector and macro factors that have constrained visit growth at veterinary clinics. We’ve updated our 2024 financial outlook to incorporate recent sector trends, which we estimate will constrain the high-end of our full year organic growth outlook this year. We’ve also incorporated updated estimates for foreign exchange effects to reflect the recent strengthening of the US dollar.

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Q&A Session

Building on our strong first quarter performance, we’re reinforcing our operational EPS outlook at midpoint. This reflects consistent goals for solid comparable operating margin improvement this year and favorable adjustments to estimates for net interest expense benefiting from our strong cash flow generation. We’ll review our updated guidance detail later in my comments. Let’s begin with a review of our first quarter results. First quarter organic revenue growth of 7% was driven by 7% organic CAG gains and a 11% organic growth in our water business, with overall gains moderated by a 3% organic growth decline in LPD. CAG organic revenue growth was supported by 8% organic growth in veterinary software and diagnostic imaging revenues, driven by a 11% organic gains and recurring revenues.

CAG instrument revenue increased 3% organically, building on high prior year placement levels. CAG Diagnostic recurring revenue increased 7% organically in Q1, supported by average global net price improvement of 5% to 6%, with US net price realization at the lower end of this range. CAG Diagnostic recurring revenue growth in Q1 reflected solid gains across our major regions. International CAG Diagnostic recurring revenue organic growth was 9%, reflecting benefits from net price realization and solid volume gains, building on 2023 second half momentum. International results continue to be driven by IDEXX execution, reflected in strong business gains and high premium instrument placements, which supported a double-digit year-on-year expansion of our global premium instrument installed base.

US CAG Diagnostic recurring revenue organic growth was 6.5% in Q1, which reflects a continued significant growth premium compared to same-store US clinical visit growth levels which declined an estimated 2.3% overall in the quarter, including negative impacts from severe January weather. IDEXX’s solid growth results reflect sustained levels of diagnostic frequency and increased diagnostic utilization per clinical visit at the practice level. It also reflects benefits from IDEXX execution drivers, including solid new business gains, sustained high customer retention levels and net price realization. Excluding estimated weather impacts, US clinical visit growth levels in the first quarter were relatively softer than targeted in our midpoint outlook.

These trends reflect ongoing staffing challenges at veterinary clinics and potentially pressure on US consumers from broader cumulative macro impacts. While pet owner demand for healthcare services remains durable and resilient and we’re confident in IDEXX’s ability to execute and drive continued solid organic revenue growth. We believe it’s prudent to factor these near-term sector trends into our outlook. This is reflected in adjustments to the high-end of our 2024 full year organic revenue growth guidance. IDEXX achieved solid organic revenue growth across our modalities in Q1. IDEXX VetLab consumable revenues increased 9% organically, reflecting high single-digit gains in the US, and double-digit organic growth in international regions. And similar gains were supported by 11% year-on-year growth in our global premium instrument installed base, reflecting gains across our catalyst premium hematology and SediVue platforms.

We placed 4,791 CAG premium instrument placements in Q1, an increase of 8% year-on-year compared to high prior year levels. This was supported by strong growth in ProCyte One placements with the global ProCyte One installed base increasing to over 15,000 instruments. Global Catalyst placements decreased year-on-year in the quarter, reflecting comparisons to high prior year placement levels and shifts in placement mix in international regions. Global Rapid Assay revenues expanded 5% organically in Q1, driven by high single-digit gains in the US, including benefits from higher net price realization. Global Lab revenues increased 6% organically, reflecting similar solid gains in the US and international regions. Veterinary software and diagnostic imaging revenues increased 12% as reported, including benefits from our recent software and data platform acquisition, which adds to our software ecosystem.

8% overall organic gains were driven by 11% organic growth in recurring revenues, reflecting benefits from ongoing momentum in cloud-based self-replacement. Water revenues increased 11% organically in Q1, driven by double-digit gains in the US and Europe, including benefits from higher shipment order timing. Livestock, poultry and dairy revenues decreased 3% organically. Solid gains in the US and Europe were moderated by lower Asia Pacific revenues, including impacts from lower herd health screening revenues related to reduced China import testing in comparison to higher prior year swine testing levels in China. We expect these negative growth impacts to moderate in the second half of 2024. Turning to the P&L. Q1 profit results were supported by solid gross margin gains.

Gross profit increased 9% in the quarter as reported and on a comparable basis. Gross margins were 61.5%, up 110 basis points on a comparable basis. Gross margin gains reflected benefits from business mix, lower instrument costs and software service margin expansion. On a reported basis, operating expenses increased 12% year-on-year including approximately 6.5% of overall growth impact related to the lapping of a prior $16 million customer contract resolution payment. Q1 OpEx growth was driven by increases in R&D spending aligned with advancing our innovation agenda, including new platform development. EPS was $2.81 per share in Q1, an increase of 10% as reported and 9% on a comparable basis. Net of a 7% negative EPS growth rate impact related to the lapping of the prior year customer contract resolution payment.

Foreign exchange had a limited impact on gross margin, operating profit and EPS in the quarter, net of a $1 million hedge gain. Free cash flow was $168 million in Q1, reflecting normal seasonality. On a trailing 12-month basis, our net income to free cash flow conversion ratio was 92%. For the full year, we’re maintaining our outlook for free cash flow conversion of 90% to 95%, reflecting estimated capital spending of approximately $180 million. Our balance sheet remains in a strong position. We ended the quarter with leverage ratios of 0.7 times gross and 0.4 times net of cash as we continue to manage our balance sheet conservatively in the current interest rate environment. We allocated $155 million in capital to share repurchases in the first quarter.

Diluted shares outstanding were relatively flat compared to prior year levels. Turning to 2024 guidance. We’ve updated our full year P&L outlook to reflect adjustments to the high end of our full year organic growth goals. Our outlook reinforces our full year goals for solid comparable operating margin improvement and incorporates favorable adjustments to estimates for net interest expense. We’ve also revised estimates for foreign exchange impacts, reflecting the recent strengthening of the US dollar. In terms of our revenue outlook, we’ve updated our full year guidance for reported revenues to $3.895 billion to $3.965 billion, a reduction of $55 million at midpoint. Compared to earlier estimates, our updated reported revenue outlook includes a $35 million or approximately 1% negative growth rate impact related to the recent strengthening of the US dollar.

We’ve also lowered the high end of our full year organic growth outlook by 1% to capture more recent trends for US clinical visits, which have constrained the organic revenue growth outlook for the first half of 2024. Our updated full year guidance for overall organic growth is now 7% to 9% supported by 7.5% to 9.5% gains in CAG Diagnostic recurring revenues. For the full year, our outlook for overall organic growth continues to reflect expectations for solid CAG Diagnostic recurring revenue gains, supported by IDEXX execution. Our midpoint outlook aligns with expectations of approximately 1.5% declines in US clinic visits in Q2, similar to late Q1 trends. In the second half of 2024, our midpoint outlook continues to assume a relative flattening of US clinical visit trends.